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POLICY BRIEF FROM AMERICANS FOR TAX REFORM

Ashcroft Revives Tax Reform

by Peter J. Ferrara

What seemed like a moribund tax reform debate was suddenly revived earlier this month when Sen. John Ashcroft (R-MO), a top Presidential contender for 2000, unveiled a highly innovative, politically well crafted, substantively well designed tax reform plan.

     First of all, Sen. Ashcroft’s plan is a major tax cut. Everyone would pay less under Ashcroft’s plan. In fact, an income tax rate of only 10% would apply to wages up to $68,400 this year, which is the maximum taxable income under Social Security. About 85% - 90% of workers would pay this 10% income tax rate on their wages, as they earn less than this $68,400 limit. Moreover, this will remain true in the future, as the limit is automatically indexed to grow with wages each year.

     Wages above this level and other income not subject to the Social Security tax would be taxed at a 25% rate. Since the reform proposal, with just two rates of 10% and 25%, is wrapped around the Social Security payroll tax, which totals about 15%, Ashcroft’s plan is effectively a flat tax for the Federal tax system overall, Social Security and income taxes combined.

     The capital gains tax rate would also be slashed to 10% across the board. The corporate tax rate would be 25%.

     The Ashcroft tax reform plan would retain just 4 deductions for individuals, on the grounds that they promote basic American values. These include the deduction for mortgage interest, charitable giving, state and local taxes, and health insurance premiums. Ashcroft believes workers should not have to pay income taxes on money they must pay for state and local taxes. Moreover, workers who do not receive employer provided insurance would nevertheless receive the same tax break for health insurance they buy directly on their own, which would be quite beneficial as a matter of health care policy.

     All individuals, including children, would also be able to contribute up to $5,000 each year to an expanded IRA system. There would be no deduction for these contributions, but the income would be tax free, with no restrictions or penalty on withdrawals. So a family of four could contribute up to $20,000 per year to these accounts.

     For seniors, all Social Security benefits would be tax free, and the death tax, euphemistically called the estate tax, would be abolished. Family farms and businesses could then be passed on to children, rather than sold to pay still more taxes.

     Overall, this plan would be a big tax cut, about $300 billion per year on average over the next 10 years. But Ashcroft commits in his plan to cut government spending by more than enough to offset this revenue reduction to the government. He proposes in fact to cut Federal spending on average by about $350 billion per year for each of the next 10 years.

     Of course, that would still leave lots of Federal government, spending on average about $1.6 trillion for each of the next 10 years. But it would be a big, long overdue, and nevertheless quite reasonable reduction. Ashcroft has consequently placed his entire campaign four square behind smaller government.

     Besides reducing the tax burden on hardworking Americans, Ashcroft’s plan would further expand the growing economy. The Heritage Foundation estimates the plan would create an additional 2 million jobs and increase economic growth by 1.5 percentage points, for each year indefinately into the future. These are major increases.

     Indeed, Art Laffer says, "This is about as good as it gets. It’s absolutely spectacular." Bear Stearns Chief Economist Larry Kudlow, formerly Chief Economist at OMB under Reagan, says, "Senator Ashcroft’s proposal is solidly pro-growth. It will add much needed incentives for a 21st century of virtually unlimited wealth creation and entrepreneurship."

     With this proposal, Ashcroft has joined Steve Forbes as the Presidential contender running the most substantive campaigns. Indeed, these two together would be some ticket, offering voters probably the 2 sharpest people ever on a national ticket.

Peter Ferrara is General Counsel and Chief Economist at Americans for Tax Reform